Bid-Ask Spread
Definition
The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). A tighter spread indicates higher liquidity.
The bid-ask spread is the invisible cost of trading that many investors overlook. The bid price is what buyers are currently offering to pay; the ask price is what sellers are demanding. The spread between them is profit for market makers and a cost for traders who need immediate execution.
For highly liquid securities like Apple (AAPL) or the SPY ETF, spreads are typically one cent — insignificant for most traders. For less liquid stocks, small-cap securities, or exotic crypto tokens, spreads can be substantial. A token with a $1.00 bid and $1.05 ask has a 5% spread, meaning you lose 5% of your investment immediately upon buying at the ask and selling at the bid.
The spread varies with market conditions. During market hours for liquid stocks, spreads are tightest. During pre-market/after-hours trading, weekends (for crypto), or periods of high volatility, spreads widen as market makers demand more compensation for the increased risk of providing liquidity.
For investors, the bid-ask spread matters most with frequent trading, illiquid securities, or large orders. A 0.10% spread doesn't matter for a buy-and-hold investor but costs significant money for a day trader making hundreds of trades. Large orders can also "walk the book," filling at progressively worse prices beyond the displayed spread.
Limit orders help manage spread costs by letting you specify your price. Instead of paying the ask or accepting the bid, you can place an order within the spread and potentially get a better execution price.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
Why are crypto spreads wider than stock spreads?
Crypto markets are generally less liquid, trade on fragmented exchanges, and have higher volatility — all of which widen spreads. Major pairs (BTC/USD on large exchanges) have tight spreads, but altcoins on smaller exchanges can have very wide spreads.
How does the bid-ask spread affect my returns?
The spread is a hidden transaction cost. You buy at the ask (higher) and sell at the bid (lower). For a stock with a $0.01 spread at $100, the cost is 0.01% per round trip — negligible. For a crypto token with a 2% spread, you start 2% down immediately after buying.